Claims from tax whistleblowers can take years to get through the Internal Revenue Service’s review and award determination process, according to a new report from the Government Accountability Office.
The report noted that the Tax Relief and Health Care Act of 2006 expanded the IRS’s whistleblower program, increasing rewards for submitting information on others' tax underpayments to up to 30 percent of collected proceeds. The expanded program targets tax underpayments over $2 million and could reduce the gap between taxes owed and taxes paid.
The IRS's Whistleblower Office has received over 1,300 submissions qualifying for the new program since 2007. However, as of April 2011, approximately 66 percent of the claims submitted in the first two years of the program, fiscal years 2007 and 2008, were still in process. According to IRS officials, claims can take years to process because the IRS must take various steps to ensure the integrity of claim reviews and resulting taxpayer examinations.
In addition, taxpayers who are subject to examination can exercise rights that can add years to the process. The IRS does not collect complete data on the time each step takes or the reasons why claims are rejected. Without such data, the IRS may be unable to identify potential improvements that could speed up claim-processing efficiency.
Furthermore, not all of the IRS divisions that review whistleblower claims have time targets for their subject matter expert reviews. Nor does the IRS Whistleblower Office have a systematic process to check in with the divisions about the time taken for their initial reviews.
The IRS is limited in what information it can share with whistleblowers about the status of claims because of statutes protecting the privacy of tax information, the GAO noted. For example, because the IRS cannot disclose if it is examining a taxpayer, it cannot inform whistleblowers about the progress of their claims or the reasons why their claims have been rejected.
One mechanism through which the Whistleblower Office can communicate program results is its annual report to Congress. However, the most recently released report, for fiscal year 2010, did not contain information on case-processing times or specific data on why the IRS rejected claims.
Collecting additional data and including it in the report could improve the transparency of the program and Congress's ability to oversee it. Federal and state whistleblower programs have features with potential benefits that could improve the IRS's expanded whistleblower program, including options that increase interaction or the information shared with whistleblowers, and options that attempt to improve the accountability for claim processing.
While there are potential advantages to all of the identified options, the GAO acknowledged that it is difficult to determine if the advantages outweigh the disadvantages for many options. Furthermore, the IRS would be limited by taxpayer data protections in implementing some of the options.
The GAO recommended that the IRS collect more information—including data on the time each step takes for all claims and reasons for claim rejection—in its claim-tracking system, establish a process to follow up on claims that exceed review time targets, and include more information on these issues in its annual reports to Congress.
In response to the report, the IRS generally agreed with the GAO’s recommendations.
Sen. Chuck Grassley, R-Iowa, who wrote the 2006 law improving the IRS whistleblower office to encourage people with information about big-dollar tax fraud to come forward and lead to the substantial recovery of tax dollars for the U.S. Treasury, said the GAO report should encourage the IRS and the Treasury Department to make changes in the program.
“The report makes clear that the whistleblower program has been a success in providing good information to the IRS about big-dollar tax cheating,” Grassley said in a statement. “The statistics show the IRS views a significant number of the whistleblower claims as having merit. The IRS has received tips on more than 9,500 taxpayers from 1,400 whistleblowers in just five years. The IRS has acted or is acting on almost 8,300 of these claims, so only about 1,300 tips have been rejected so far. Now the challenge is for the IRS and Treasury to make the changes needed to provide assurance to existing and future whistleblowers so they’re not discouraged by the time needed to process their claims. With the nation facing massive deficits, Treasury and IRS officials need to do all they can to ensure the success of what’s clearly one of the best tools available to go after tax fraud.”
Grassley modeled the IRS whistleblower improvements after the successful 1986 whistleblower amendments to the federal False Claims Act.
In April, an in-house accountant who raised a red flag about a tax lapse that his employer then ignored, leading him to tip off the IRS, received $4.5 million in the first whistleblower award under the new, improved IRS Whistleblower Office, with a recovery for the taxpayers of a net $20 million in taxes and interest from the financial services firm.
“The report has good recommendations that the IRS needs to implement tomorrow,” said Grassley. “The IRS needs to do a better job of communicating with whistleblowers. Silence between the IRS and the whistleblowers only helps the tax cheats. I’m concerned that the IRS management still might have too many opportunities to say no to a whistleblower, even when the whistleblower office believes a claim has merit. The IRS commissioner has to make it clear that he expects the director of the IRS Whistleblower Office to speak up if it thinks an IRS office is foot-dragging on a good whistleblower claim.”
Grassley noted that the law gives the IRS Whistleblower Office the power to investigate claims on its own.
“The IRS commissioner should make that clear to all of his managers and provide the necessary resources so that valid whistleblower claims aren’t forgotten,” he said. “We can’t let the next Madoff get a free pass just because someone doesn’t want to be bothered. Going through whistleblower claims is work, but it’s worth it.”
Grassley added that the GAO report found the IRS is short on resources but also is doing nothing to take advantage of the resources of the whistleblower and his attorneys. “This has to stop,” he said. “A key provision of the whistleblower law, and a big part of the success of the False Claims Act provisions that I co-wrote, is to allow the government to leverage the whistleblower’s resources. It’s worrisome that the IRS hasn’t taken advantage of this provision even once. The tax cheats shouldn’t be the only ones who can take advantage of outside legal talent. The IRS can’t ask for more resources while ignoring the free resources available.”
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